bmi vietnam business forecast report q2 2012

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Includes 10-year forecasts to end-2017
Published by BUSINESS MONITOR INTERNATIONAL LTD
BUSINESS FORECAST REPORT
Q2 2012
www.businessmonitor.com
VIETNAM
INCLUDES 10-YEAR FORECAST TO 2021
Macro Stability Going Forward
ISSN 1745-0764
Published by Business Monitor International Ltd.
Copy Deadline: 10 February 2012
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VIETNAM Q2 2012
VIETNAM – MACROECONOMIC INDICATORS
2011e 2012f 2013f 2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f
Nominal GDP, US$bn [3] 120.4 135.7 153.6 175.9 200.6 228.7 259.2 292.3 329.7 372.0 419.8
Nominal GDP, VNDbn [3] 2,487,631 2,854,800 3,195,190 3,617,838 4,077,805 4,597,168 5,183,695 5,846,181 6,594,585 7,440,183 8,395,743
Nominal GDP, EURbn [3] 86.7 105.2 122.9 140.7 160.5 183.0 207.3 233.8 263.8 297.6 335.8
GDP per capita, US$ [3] 1,357 1,512 1,694 1,921 2,170 2,452 2,754 3,080 3,447 3,861 4,326
GDP per capita, EUR [3] 976 1,172 1,356 1,537 1,736 1,961 2,203 2,464 2,758 3,089 3,461
Real GDP, % chg y-o-y [3] 5.9 5.8 6.5 7.3 7.3 7.4 7.4 7.4 7.4 7.5 7.5
Private consumption, % of GDP [3] 66.8 66.8 66.3 65.5 64.7 63.9 63.0 62.2 61.4 60.6 59.7
Private nal consumption, VND real growth % y-o-y [3] 6.4 5.7 5.8 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0
Government nal consumption, % of GDP [3] 6.5 6.5 6.4 6.2 6.1 6.0 5.8 5.7 5.6 5.5 5.3
Government nal consumption, VND real growth % y-o-y [3] 5.9 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
Fixed capital formation, % total GDP [3] 35.2 35.0 34.6 34.2 33.8 33.3 32.9 32.5 32.1 31.6 31.2
Fixed capital formation, VND real growth % y-o-y [3] 4.9 5.1 5.4 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0
Population, mn [4] 88.8 89.7 90.7 91.6 92.4 93.3 94.1 94.9 95.6 96.4 97.0
Unemployment, % of labour force, eop [5] 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
Consumer prices, % y-o-y, ave [1,5] 18.6 8.5 5.0 5.5 5.0 5.0 5.0 5.0 5.0 5.0 5.0
Lending rate, %, ave [6] 19.5 13.0 11.0 10.0 9.0 8.0 8.0 8.0 8.0 8.0 8.0
Central Bank policy rate, % eop [7] 15.0 11.0 9.0 8.0 7.0 7.0 7.0 7.0 7.0 7.0 7.0
Exchange rate VND/US$, ave [8] 20,653.31 21,035.00 20,800.00 20,565.00 20,330.00 20,100.00 20,000.00 20,000.00 20,000.00 20,000.00 20,000.00
Exchange rate VND/EUR, ave [8] 28,708.10 27,135.15 26,000.00 25,706.25 25,412.50 25,125.00 25,000.00 25,000.00 25,000.00 25,000.00 25,000.00
Budget balance, US$bn [9] -3.1 -4.6 -4.2 -4.3 -4.3 -4.4 -4.4 -4.8 -5.3 -5.9 -5.7
Budget balance, % of GDP [9] -2.6 -3.4 -2.7 -2.5 -2.2 -1.9 -1.7 -1.7 -1.6 -1.6 -1.4
Goods and services exports, US$bn [2,10] 87.7 97.5 109.8 123.7 139.3 156.8 176.6 198.9 224.0 252.2 284.0
Goods and services imports, US$bn [2,11] 102.9 114.6 127.6 142.2 158.4 176.5 196.6 219.1 244.1 272.0 303.2
Balance of trade in goods and services, US$bn [2,12] -9.3 -17.0 -17.8 -18.5 -19.1 -19.6 -20.0 -20.2 -20.2 -19.9 -19.2
Balance of trade in goods and services, % of GDP [13] -12.6 -12.6 -11.6 -10.5 -9.5 -8.6 -7.7 -6.9 -6.1 -5.3 -4.6
Current account, US$bn [13] -5.7 -6.6 -6.3 -5.8 -5.2 -4.3 -3.1 -1.6 0.3 2.6 5.5
Current account, % of GDP [13] -4.7 -4.8 -4.1 -3.3 -2.6 -1.9 -1.2 -0.6 0.1 0.7 1.3

Foreign reserves ex gold, US$bn [13] 19.6 21.2 23.5 26.9 31.3 37.1 44.4 53.7 65.3 79.6 97.4
Import cover, months g&s [13] 2.7 2.6 2.6 2.7 2.8 3.0 3.3 3.6 3.9 4.3 4.7
Notes: e BMI estimates. f BMI forecasts. 1 Base year 2000; 2 Includes Investment Income ows up until 2004; Sources: 3 Asian Development Bank, General Statistics Ofce. 4 World Bank/UN/BMI; 5 General
Statistics Ofce; 6 IMF; 7 State Bank of Vietnam; 8 BMI; 9 Ministry of Finance; 10 Asian Development Bank, General Statistics Ofce from 2010; 11 Asian Development Bank, General Statistics Ofce from 2015;
12 Asian Development Bank, General Statistics Ofce from 2020; 13 Asian Development Bank.
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Contents
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Further Reforms Crucial In Reinforcing Condence In The CPV 8
Despite growing concerns that recent political uprisings in the Middle East would spread towards other authoritarian regimes including
Vietnam, we believe that the risk of a major political upheaval in Vietnam remains remote in the medium term. We note that there has
been a decisive shift in the Communist Party of Vietnam (CPV)'s direction towards allowing for democratic reforms and addressing
rampant corruption. We believe that further reforms will be crucial in reinforcing condence in the CPV's leadership over the coming
years.
TABLE: VIETNAM POLITICAL OVERVIEW 8
Long-Term Political Outlook 10
Key Political Challenges Over The Coming Decade 10
Vietnam's biggest political question over the coming decade is whether one-party rule under the Communist Party of Vietnam (CPV) will
face growing calls for democratisation, as was the case in other major South East Asian countries. While our core scenario envisages
the CPV transforming itself into a technocratic administration, it faces major economic challenges which if mismanaged could lead to
widespread unrest. On the foreign policy front, we expect an increasingly powerful China to drive Vietnam further into the camp of Asian

nations with close relations with the US.
Scenarios For Political Change 11
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
Global Headwinds To Depress Real GDP Growth 14
Vietnam's real GDP growth is expected to remain subdued at 5.8% in 2012, in line with our view that external demand will cool over the
coming months. We expect net exports to remain a major drag on growth before we see a recovery in external demand in late 2012.
The threat of a severe credit squeeze due to growing risk aversion towards heavily indebted emerging markets places further downside
risk to our outlook on Vietnam's economic growth.
TABLE: ECONOMIC ACTIVITY 14
Surge In Headline CPI Transitory, View On Rate Cuts Holds 16
The latest surge in month-on-month headline consumer price ination (CPI) from 0.5% in December to 1.0% in January should prove to
be transitory, in our view.
TABLE: MONETARY POLICY 16
Balance Of Payments 17
Global Economic Headwinds Cloud Outlook For BoP 17
Vietnam's balance of payments position remains vulnerable to global economic headwinds in 2012. While the trade decit has narrowed
signicantly in recent months, our conviction that external demand will continue to cool in 2012 means that we see a widening of the
current account decit. Meanwhile, risks of a hard landing in China and a credit squeeze from European banks continue to cloud the
outlook for the nancial account.
TABLE: CURRENT ACCOUNT 18
Fiscal Position To Deteriorate On Economic Headwinds 19
Stubborn global economic headwinds are expected to undermine the Vietnamese government's efforts to reduce the country's
persistent budget decit in the near term. We expect the budget decit to widen from an expected 2.6% of GDP in 2011 to 3.4% in
2012 before seeing an improvement to 2.8% in 2013. Over the longer term, a lack of commitment by the government to reduce welfare
subsidies means that we remain skeptical towards the government's plan to achieve a balanced budget by 2020.
TABLE: FISCAL POLICY 20
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VIETNAM Q2 2012
Chapter 3: 10-Year Forecast 23
The Vietnamese Economy To 2021 23
Rebalancing Needed To Maintain High Growth 23
We remain positive about Vietnam's growth prospects over the next 10 years, as seen in our rm growth projections, averaging
7.1% over 2012-2021. This is because we expect a shift in government policy to accommodate the effects of a less conducive global
environment and a need to avoid overheating tendencies such as high ination and a large trade decit, which have characterised the
Vietnamese economy in recent years.
TABLE: LONG-TERM MACROECONOMIC FORECASTS 23
Chapter 4: Business Environment 25
SWOT Analysis 25
BMI Business Environment Risk Ratings 25
Business Environment Outlook 26
Inroduction 26
Institutions 26
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS 26
TABLE: BMI LEGAL FRAMEWORK RATING 27
TABLE: LABOUR FORCE QUALITY 28
Infrastructure 29
TABLE: TRADE AND INVESTMENT RATINGS 29
TABLE: VIETNAM TOP EXPORT DESTINATIONS 30
Market Orientation Foreign 31
Tax Regime 32
Operational Risk 33
Chapter 5: Key Sectors 35
Autos 35
Executive Summary 35
TABLE: VIETNAM AUTOS SECTOR – HISTORICAL DATA AND FORECASTS 36

Industry Forecast 36
Food & Drink 37
Executive Summary 37
Industry Forecast – Food 38
TABLE: FOOD CONSUMPTION INDICATORS – HISTORICAL DATA & FORECASTS 39
TABLE: ALCOHOLIC DRINKS VALUE/VOLUME SALES HISTORICAL DATA & FORECASTS 40
Industry Forecast – Drink 40
TABLE: MASS GROCERY RETAIL VALUE SALES BY FORMAT – HISTORICAL DATA & FORECASTS 42
Other Key Sectors 44
TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS 44
TABLE: OIL AND GAS SECTOR KEY INDICATORS 44
TABLE: PHARMA SECTOR KEY INDICATORS 44
TABLE: TELECOMS SECTOR KEY INDICATORS 45
TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS 45
TABLE: FREIGHT KEY INDICATORS 45
Chapter 6: BMI Global Assumptions 47
Global Outlook 47
Still Holding Together 47
TABLE: GLOBAL ASSUMPTIONS 47
TABLE: DEVELOPED STATES REAL GDP GROWTH FORECAST 48
TABLE: REAL GDP GROWTH CONSENSUS FORECASTS 48
TABLE: EMERGING MARKETS REAL GDP GROWTH FORECAST 49
Core Views
Vietnam's real GDP growth is expected to remain subdued at 5.8%
in 2012 before we see a recovery in external demand, which is
expected to come only in late 2012. The threat of a severe credit
squeeze due to growing risk aversion towards heavily indebted
emerging markets places further downside risk to our outlook on
Vietnam's economic growth.
The recent surge in month-on-month headline consumer price

ination (CPI) from 0.5% in December to 1.0% in January should
prove to be transitory, in our view. We are convinced that headline
CPI will resume its downward trajectory over the coming months,
given the fact that fundamentals with regards to money supply and
commodity prices remain unchanged.
Despite encouraging evidence of a steady improvement in Vietnam's
balance of payments position in recent months, we are keeping a
cautious stance on our outlook for 2012. Given that we are beginning
to see signs of a hard landing for the Chinese economy in 2012,
we see a potential decline in foreign direct investment inows from
China and Hong Kong.
Major Forecast Changes
We have downgraded our real GDP growth forecast from 6.3% to
5.9% for 2011 and we expect a further slowdown in growth to 5.8%
in 2012.
Key Risks To Outlook
Downside Growth Risks From Rising Commodity Prices: Should
commodity prices continue to trend higher in 2012, we could see
the central bank adopting a more hawkish stance on monetary
policy. Delays in normalising interest rates would present signicant
downside risks to economic growth.
Devaluation Risks From Persistent Trade Decit: Despite multiple
devaluations since late 2009, Vietnam's trade decit has witnessed
a steady improvement. However, should we fail to see a sustained
improvement in the trade balance, we would not be surprised to see
the Vietnamese dong coming under further selling pressures.
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Executive Summary


Brief Methodology
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Chapter 1:
Political Outlook
SWOT Analysis
Strengths
The Communist Party of Vietnam remains committed to market-
oriented reforms and we do not expect major shifts in policy direction
over the next ve years. T he one-party system is generally conducive
to short-term political stability.
Relations with the US have witnessed a marked improvement, and
Washington sees Hanoi as a potential geopolitical ally in South East
Asia.
Weaknesses
Corruption among government ofcials poses a major threat to the
legitimacy of the ruling Communist Party.
There is increasing (albeit still limited) public dissatisfaction with the
leadership's tight control over political dissent.
Opportunities
The government recognises the threat corruption poses to its legiti-
macy, and has acted to clamp down on graft among party ofcials.
Vietnam has allowed legislators to become more vocal in criticis-

ing government policies. This is opening up opportunities for more
checks and balances within the one-party system.
Threats
Macroeconomic instabilities in 2012 are likely to weigh on public
acceptance of the one-party system, and street demonstrations to
protest economic conditions could develop into a full-on challenge
of undemocractic rule.
Although strong domestic control will ensure little change to Viet-
nam's political scene in the next few years, over the longer term,
the one-party-state will probably be unsustainable.
Relations with China have deteriorated over recent years due
to Beijing's more assertive stance over disputed islands in the
South China Sea and domestic criticism of a large Chinese in-
vestment into a bauxite mining project in the central highlands.
BMI Political Risk Ratings
Vietnam's short-term political risk rating of 76.9 reects a largely stable
political system, kept in place by the ruling Communist Party of Vietnam's
monopoly on power. While public expressions of discontent have so far
been limited, slower growth and high ination pose a threat to stability
in the near term. However, we see one-party rule as inherently unsus-
tainable in the longer term, and thus accord Vietnam a rating of 52.8 in
our long-term political risk ratings, due mainly to a score of 27.6 in the
'characteristics of polity' rating.
S-T Political Rank Trend
Singapore 95.4 1 =
Brunei Darussalam 90.6 2 =
Hong Kong 86.0 3 =
Taiwan 83.3 4 =
Laos 80.4 5 =
Malaysia 79.0 6 =

China 78.5 7 =
Sri Lanka 78.3 8 =
South Korea 77.7 8 =
Vietnam 76.9 10 =
Indonesia 73.5 11 =
North Korea 72.7 12 =
Philippines 67.9 13 =
Cambodia 67.3 14 =
Bangladesh 67.1 15 =
Thailand 65.4 16 =
India 64.0 17 =
Bhutan 61.0 18 =
Myanmar 56.5 19 =
Papua New Guinea 51.9 20 =
Pakistan 45.2 21 =
Regional ave 73.1 / Global ave 65.7 / Emerging markets ave 63.3
L-T Political Rank Trend
South Korea 84.2 1 =
Singapore 80.6 2 =
Taiwan 75.4 3 =
Hong Kong 72.9 4 =
China 67.4 5 =
Malaysia 67.2 6 =
India 67.1 7 =
Brunei Darussalam 65.6 8 =
Philippines 62.8 9 =
Bangladesh 62.6 10 =
Sri Lanka 60.2 11 =
Indonesia 59.0 12 =
Cambodia 58.9 13 =

Thailand 58.8 14 =
Papua New Guinea 57.7 15 =
North Korea 55.2 16 =
Vietnam 52.8 17 =
Pakistan 52.7 18 =
Bhutan 51.0 19 =
Laos 44.5 20 =
Myanmar 33.7 21 =
Regional ave 62.0/ Global ave 63.3 / Emerging markets ave 59.7
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VIETNAM Q2 2012
Domestic Politics
Further Reforms Crucial In
Reinforcing Condence In The CPV
BMI VIEW:
Despite growing concerns that recent political uprisings in the Mid-
dle East would spread towards other authoritarian regimes including
Vietnam, we believe that the risk of a major political upheaval in Viet-
nam remains remote in the medium term. We note that there has been
a decisive shift in the Communist Party of Vietnam (CPV)'s direction
towards allowing for democratic reforms and addressing rampant cor-
ruption. We believe that further reforms will be crucial in reinforcing
condence in the CPV's leadership over the coming years.
The need for political reforms has become increasingly crucial in
reinforcing public condence in Vietnam's single-party system
of government, which the ruling Communist Party of Vietnam
(CPV) has fervently tried to defend over the decades. In light
of the recent political turmoil in the Middle East and large-scale

protests against authoritarian governments in countries such as
China and Russia, international political observers are beginning
to warn of a similar political uprising in Vietnam. From our
perspective, we believe that examples of successful uprisings
in the Middle East, which have toppled authoritarian govern-
ments and paved the way for democratic reforms in the case of
Libya and Egypt, could in turn, fuel political dissidents' desire
for reforms in Vietnam. Indeed, the threat of social instability,
which is why we are keeping a score of 57.5 (out of a score
of 100) for the 'Social Stability' subcomponent of our political
risk rating. This translates into a score of 76.9 for our overall
short-term political risk rating for Vietnam. However, we believe
that concerns of a major political upheaval are unwarranted, at
least for now.
Conditions In Vietnam Are Starkly
Different
We note that several factors separate Vietnam from countries
TABLE: VIETNAM POLITICAL OVERVIEW
System of Government Single-Party Socialist Republic
Head of State President Truong Tan Sang (serving rst ve-year term)
Head of Government Prime Minister Nguyen Tan Dung (serving rst ve-year term)
Last Election Parliamentary – May 2011
Presidential – July 2007
Composition Of Current Government Communist Party of Vietnam
Key Figures The 14-person Communist Party Politburo, elected by the 160-person party central committee at the national
party congress, acts as the de facto highest decision-making body and comprises the top leadership of the
CPV. Its most important members are: Party General Secretary Nong Duc Manh, State President Truong Tan
Sang, Prime Minister Nguyen Tan Dung and General Minister of Public Security Le Hong Anh.
Other Key Posts Deputy Prime Minister – Nguyen Sinh Hung, Foreign Minister – Pham Gia Khiem, Minister of Planning and
Investment – Vo Hong Phuc, Vice President – Truong My Hoa, Central Bank Governor – Nguyen Van Giau.

Main Political Parties (number of seats in
parliament)
Communist Party of Vietnam (CPV): Founded in Hong Kong in 1930, the CPV has been in power in North
Vietnam since independence in 1954 and in the South since the end of the American War in 1975. Divisions
exist within the party between a younger, more reform-minded faction originating from Southern Vietnam and
an older generation, originating from the North, more aligned to traditionally communist ideology.
Next Election Presidential and Parliamentary – May 2012
Ongoing Disputes Ongoing dispute with China, Malaysia, the Philippines and Taiwan over Spratly Islands in South China Sea
Key Relations/ Treaties ASEAN and WTO Member, Temporary seat (2008-2009) on the United Nations Security Council
BMI Short-Term Political Risk Rating 76.9
BMI Structural Political Risk Rating 52.8
Source: BMI
No Imminent Risks Of Unrest
Short-Term Political Risk Rating
50
55
60
65
70
75
80
85
90
95
100
Singapore
Brunei
Laos
Malaysia
Vietnam

Indonesia
Philippines
Thailand
Cambodia
Myanmar
STPR
Regional Average
Source: BMI
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POLITICAL OUTLOOK
that have experienced some form of major political uprising
in recent years. Firstly, in terms of the direction of the CPV's
economic policies over the past decade, we have witnessed a
great amount of effort from the government in ensuring that
the lower-income population has been given a fair chance to
participate in the country's growth. Although the poverty rate
in Vietnam remains relatively high, we have witnessed a sig-
nicant improvement from 22.0% in 2005 to 9.5% in 2010. A
large proportion of the lower-income groups have also beneted
from the government's economic policies in recent years. The
agricultural sector, which employs a dominating share of the
country's low-skilled workers, continues to enjoy considerable
amount of nancial support from the government in terms of
preferential lending rates from state-owned banks. Government-
led investment in the development of the agricultural sector has
also helped to improve productivity and boost rural incomes.
Although such policies have contributed to Vietnam's deterio-
rating scal position, these subsidies have at least helped to

mitigate unrest among the lower-income groups.
Secondly, we note that although land rights violations and cor-
ruption remain rampant in Vietnam and have been a key source
of dissent against the government, we have at least witnessed
a strong commitment by the CPV to address these problems in
recent years. According to the Transparency International 's
2011 Corruption Perceptions Index, Vietnam ranks 112 out of
183 countries, an encouraging improvement from the country's
previous ranking of 116 out of 178 countries in 2010. The in-
crease in incidents of public unrest globally is expected to put
further pressure on the CPV to speed up efforts on this front and
we believe that addressing corruption will remain on top of the
government's agenda in 2012. Indeed, success in tackling cor-
ruption would represent a major step in reinforcing condence
in the CPV's leadership and this would, in turn, boost the CPV's
credibility in pushing forward with further political reforms
over the coming years.
A Decisive Shift Towards Further
Reforms
In recent years, we have witnessed a decisive shift in the CPV's
policymaking process whereby senior conservative members
within the politburo have taken a step back from economic
policy decisions and more towards a supervisory role within
the CPV. The National Assembly – a 493-member unicameral
body that is re-elected every ve-years – has also been given
more power in setting the direction of the country's economic
policies. We see these developments as a positive sign that the
government will allow for more economic reforms while tak-
ing further steps in the direction of democratic reforms. More
importantly, we believe that these reforms will be crucial for

the country in extending its economic footprint globally and
we expect further progress on this front over the coming years.
Source: BMI
50
55
60
65
70
75
80
85
90
95
100
Policy-Making
Process
Social Stability
Security/External
Threats
Policy Continuity
Social Stability Remains A Concern
Short-Term Political Risk Rating
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VIETNAM Q2 2012
Long-Term Political Outlook
Key Political Challenges Over The
Coming Decade
BMI VIEW:

Vietnam's biggest political question over the coming decade is whether
one-party rule under the Communist Party of Vietnam (CPV) will face
growing calls for democratisation, as was the case in other major South
East Asian countries. While our core scenario envisages the CPV
transforming itself into a technocratic administration, it faces major
economic challenges which if mismanaged could lead to widespread
unrest. On the foreign policy front, we expect an increasingly powerful
China to drive Vietnam further into the camp of Asian nations with close
relations with the US.
Although Vietnam is a politically stable country, we view the
ruling Communist Party of Vietnam's (CPV) monopoly on politi-
cal power as unsustainable over the long term. One of the CPV's
biggest challenges will be managing Vietnam's transformation
into a more pluralistic society over the coming decade and be-
yond. Indeed, the CPV's strict control of the media and political
opinion is already cracking, with a growing number of internet
bloggers becoming increasingly critical of government policy.
Challenges And Threats To Stability
Ination and devaluation as drivers of discontent: As in
neighbouring China, economic growth has brought sizeable
material gains for the majority of the population. However, the
Vietnamese government's loose scal and monetary policies
have led to high levels of ination and repeated devaluations
of the dong in recent years, which have eroded the real value of
wages and savings. A failure to contain ination at a reasonable
level and uphold the real value of the dong could undermine
condence in the regime.
Divisions within the Communist Party: High ination and
devaluation have opened schisms within the CPV leadership
between proponents of continued economic reform and a more

conservative wing which believes that a deceleration or even re-
versal of reform policies would benet macroeconomic stability.
Ethnic and regional tensions: Vietnam is relatively homogene-
ous, with ethnic Viet comprising almost 90% of the population.
Ethnic minorities in the Central Highlands have previously
objected to government policies promoting migration of ethnic
Viet into the highland region. While protests have died down,
they could emerge in future. A potential spark could be the
Chinese-nanced bauxite mining project in Lam Dong and Dak
Nong provinces, which is currently causing widespread envi-
ronmental damage and raising ire among the local population.
There are also continued cultural differences between the
population of the Red River Delta around the capital Hanoi in
the north and the population of the Mekong Delta in the south,
where Ho Chi Minh City (formerly Saigon, the ex-capital of
South Vietnam) remains the commercial capital. While the
general perception is that northerners are more supportive
of socialist rule and the southerners more inclined to support
continued economic reform, a strong concept of national unity
nevertheless exists in both parts of the country.
Demands for increased religious rights: One of the most
concerted challenges against the CPV in recent years has come
from Catholics wishing for a stronger recognition of their right
to worship in what is still a nominally atheist country. Hanoi
has ceded to pressure from the US to allow a higher degree of
religious freedom, but is wary of the Catholic Church becom-
ing a rallying point of political opposition, as was the case in
Communist Poland and the Philippines during the Marcos dic-
tatorship. The Vietnamese government has thus slapped heavy
sentences on Catholic activists who have extended their ght

to encompass increased political freedom.
Relations with China: Relations with China have become in-
creasingly strained in recent years as Beijing has expanded its
economic, political and military inuence southwards. The main
point of contention is the conicting territorial claims for the
Paracel and Spratly Islands in the South China Sea. Vietnam's
relations with China have also been strained by the large bilateral
trade decit it runs with its northern neighbour, which amounts
to more than 10% of GDP, and criticism of a Chinese-nanced
bauxite mining project in the central highlands.
That said, the regimes in Beijing and Hanoi share the same
ideological base and political system, and contacts between
their respective politburos have decreased tension between
them. Nonetheless, we believe Vietnam will seek increasingly
close relations with the US – and potentially India and Japan –
in the defence sphere, as a hedge against China's rising power
in the region.
Vietnam's long-term political risk rating of 53.8/100 is weighed
down by a score of 27.6 in the 'characteristics of polity' sub-
component. This is due to the limited independence of the
11
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POLITICAL OUTLOOK
judiciary, the ban on political parties other than the CPV and
severe limitations on the media and civil society. While these
factors may presage stability in the short term, the experience
of other South East Asian nations shows that rising wealth and
development later lead to calls for political liberalisation. We
have thus drawn up three scenarios for Vietnam's political future:

Scenarios For Political Change
Core Scenario: CPV Turns Into A
Technocratic Regime
Our core scenario is for the Communist Party of Vietnam
(CPV) to shift increasingly towards a technocratic form of
government aimed at maintaining high economic growth levels
and an acceptable distribution of wealth across the population.
Ambitious young Vietnamese are already joining the CPV as
a career path and as a means to serve their country rather than
because of ideological convictions. We thus foresee a continu-
ation of economic reforms in spite of the criticism emanating
from older more traditionally-minded party members. However,
intermittent periods of harsh repression against pro-democracy
activists and other government critics are a strong indication
that political liberalisation is not in the ofng.
Best Case Scenario: Gradual
Political Liberalisation
Our best-case scenario is the above scenario combined with
a gradual move towards political liberalisation involving an
expanded role for the National Assembly, greater scope for dif-
fering opinion within the CPV, increased political competition
at elections, and greater media freedom. This scenario would
see Vietnam moving from a one-party system towards a domi-
nant-party system of the kind seen in neighbouring Cambodia,
Malaysia and Singapore, where elections are held but only the
ruling party has a realistic chance of winning them. Looking
even further beyond the horizon, the experiences of South Ko-
rea, Taiwan, and Japan have shown that even dominant-party
systems eventually give way to opposition rule. However, in
Vietnam's case this may be more than a decade away.

Worst-Case Scenario: Mass Unrest
And Violent Suppression
Our worst-case scenario involves severe policy missteps that
lead to a period of prolonged economic upheaval with high
unemployment and rapid ination eroding wealth. This would
signicantly strengthen the case for regime change, as advo-
cated by the pro-democracy movement. Faced with widespread
street protests and an all-out challenge to one-party rule, we
believe that at least part of the CPV leadership would support
a crackdown on demonstrators by security forces in order to
stay in power. A violent suppression of street protests as seen
in Beijing in 1989 and in Myanmar in 2007 could easily result
in a number of deaths and the imposition of sanctions by the
international community. If so, Vietnam would likely face not
only diplomatic isolation but also economic weakness as exports
and foreign direct investment tumble.

13
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BMI Economic Risk Ratings
Chapter 2:
Economic Outlook
SWOT Analysis
Strengths
Vietnam has been one of the fastest-growing economies in Asia in
recent years, with GDP growth averaging 7.1% annually between
2000 and 2011.
An economic boom has lifted many Vietnamese out of poverty, with
the ofcial poverty rate in the country falling from 58% in 1993 to

9.5% in 2010.
Weaknesses
Vietnam still suffers from substantial trade, current account and
scal decits, leaving the economy vulnerable to global economic
uncertainties in 2012. The scal decit is dominated by substantial
spending on social subsidies that could be difcult to withdraw.
The heavily-managed and weak currency reduces incentives to
improve quality of exports, and also keeps import costs high, con-
tributing to inationary pressures.
Opportunities
WTO membership has given Vietnam access to both foreign markets
and capital, while making Vietnamese enterprises stronger through
increased competition.
The government will in spite of the current macroeconomic woes,
continue to move forward with market reforms, including privatisation
of state-owned enterprises, and liberalising the banking sector.
Urbanisation will continue to be a long-term growth driver. The UN
forecasts the urban population rising from 29% of the population to
more than 50% by the early 2040s.
Threats
Ination and decit concerns have caused some investors to re-assess
their hitherto upbeat view of Vietnam. If the government focuses too
much on stimulating growth and fails to root out inationary pressure,
it risks prolonging macroeconomic instability, which could lead to a
potential crisis.
Prolonged macroeconomic instability could prompt the authorities
to put reforms on hold as they struggle to stabilise the economy.
Vietnam's short-term economic risk rating of 56.2 reects a deteriora-
tion of external conditions and problems that have risen as a result of
the government's previous measures to supplant a sharp reduction

in external demand with scal stimulus. Vietnam's chronic scal and
current account decits also weigh down our long-term economic risk
ratings, where the scal and external components score 45.0 and 33.3
out of 100 respectively. However, this is partly offset by a robust score
of 75.0 in the growth component, reecting a strong potential for rapid
economic expansion and bringing the overall rating to 55.5.
S-T Economy Rank Trend
Singapore 89.8 1 =
South Korea 88.8 2 =
Taiwan 84.8 3 +
China 83.1 4 =
Hong Kong 82.3 5 =
Malaysia 75.8 6 =
Indonesia 73.1 7 +
Thailand 73.1 7 =
Philippines 70.0 9 =
India 60.0 10 =
Brunei Darussalam 57.7 11 =
Vietnam 56.2 12 =
Bangladesh 53.3 13 =
Sri Lanka 51.9 14 =
Myanmar 51.0 15 =
Papua New Guinea 47.3 16 =
Pakistan 47.1 17 =
Cambodia 43.8 18 +
Bhutan 37.7 19 =
Laos 36.5 20 =
North Korea – – –
Regional ave 62.3/ Global ave 55.1 / Emerging markets ave 53.5
L-T Economy Rank Trend

South Korea 82.5 1 =
Singapore 80.7 2 =
Hong Kong 78.4 3 =
Malaysia 76.8 4 +
Taiwan 75.5 5 =
China 75.2 6 =
Thailand 73.6 7 =
Indonesia 64.5 8 =
Philippines 64.0 9 =
India 58.5 10 =
Brunei Darussalam 57.9 11 =
Bangladesh 56.4 12 =
Vietnam 55.5 13 =
Sri Lanka 50.5 14 =
Myanmar 47.5 15 =
Pakistan 47.5 15 -
Papua New Guinea 44.9 17 =
Cambodia 40.4 18 =
Laos 37.0 19 +
Bhutan 32.6 20 =
North Korea – – -
Regional ave 59.6 / Global ave 53.8 / Emerging markets ave 51.3
14
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VIETNAM Q2 2012
Economic Activity
Global Headwinds To Depress Real
GDP Growth
BMI VIEW

Vietnam's real GDP growth is expected to remain subdued at 5.8% in
2012, in line with our view that external demand will cool over the com-
ing months. We expect net exports to remain a major drag on growth
before we see a recovery in external demand in late 2012. The threat of
a severe credit squeeze due to growing risk aversion towards heavily
indebted emerging markets places further downside risk to our outlook
on Vietnam's economic growth.
Preliminary gures published by the General Statistics Ofce
showed that Vietnam's real GDP growth is expected to come in
at around 5.9% in 2011, in line with our estimate. We believe
real GDP growth will remain subdued at 5.8% in 2012 (compared
with the government's target of 7.0%) before we see a recovery
in external demand, which is expected to come only in late 2012.
Manufacturing sector growth is expected to experience a signicant
slowdown, potentially resulting in higher unemployment, while
falling crop prices are also having a negative impact on rural
incomes. We believe these factors will translate into a slowdown
in private consumption growth in 2012.
Given that Vietnam remains heavily reliant on foreign capital
inows to fuel investment, we are increasingly concerned that
growing risk aversion towards heavily indebted emerging
markets could be detrimental to Vietnam's short-term economic
growth. However, we are seeing positive signs of a shift in the
Vietnamese government's traditional pro-growth stance towards
a more balanced and sustainable growth model. This supports
our view that policymakers will avoid introducing aggressive
public spending programs to boost growth. While this suggests
2012 growth will miss the government's target, we see this as a
positive for the long-term outlook.
Source: General Statistics Ofce, BMI

Exports To Remain A Drag On Growth
Contribution To Real GDP Growth, pp
-4
-2
0
2
4
6
8
2008
2009
2010
2011f
2012f
2013f
2014f
Public Spending Private Consumption
Gross Fixed Capital Formation Net Exports
TABLE: ECONOMIC ACTIVITY
2011e 2012f 2013f 2014f 2015f 2016f
Nominal GDP, VNDbn [2] 2,487,631.9 2,854,800.0 3,195,190.0 3,617,838.8 4,077,805.6 4,597,168.3
Nominal GDP, US$bn [2] 120.4 135.7 153.6 175.9 200.6 228.7
Real GDP growth, % chg y-o-y [2] 5.9 5.8 6.5 7.3 7.3 7.4
GDP per capita, US$ [2] 1,357 1,512 1,694 1,921 2,170 2,452
Population, mn [3] 88.8 89.7 90.7 91.6 92.4 93.3
Industrial production index, % y-o-y, ave [1,4] 14.0 9.0 16.0 14.0 13.0 12.0
Unemployment, % of labour force, eop [4] 5.0 5.0 5.0 5.0 5.0 5.0
Notes: e BMI estimates. f BMI forecasts. 1 at 1994 prices; Sources: 2 Asian Development Bank, General Statistics Ofce. 3 World Bank/UN/BMI; 4
General Statistics Ofce.
Stellar Performance

Vietnam – Real GDP Growth, %
Source: BMI
0
2
4
6
8
10
2005
2006
2007
2008
2009
2010
2011e
2012f
2013f
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ECONOMIC OUTLOOK
Private Consumption Unlikely To Avert
Slowdown
Our view that manufacturing sector growth will continue to cool
in 2012 will be negative for private consumption growth. We
note that the manufacturing sector makes up 19.4% of GDP and
remains a key driver of the economy, contributing 2.1 percentage
points (pp) to real GDP growth of 5.9% in 2011. Furthermore,
the industrial sector – which includes the manufacturing and
constructions sub-sectors – presently employs an estimated

22.4% of the labour force. Given that the US, eurozone and
China remain the largest export destinations for Vietnam and
that our global team expects growth to remain depressed in
these markets, we are skeptical that the manufacturing sector
will be able to avert a slowdown over the coming months. Thus,
we see an increasing likelihood that a slowdown in external
demand could eventually result in higher unemployment in the
manufacturing sector.
In terms of the agricultural sector, which remains the largest
source of employment in Vietnam (40.0% of the labour force),
we believe falling crop prices will have a negative impact on
rural incomes. This presents further downside risks to our outlook
for private consumption growth. On the whole, our view that
external demand will only see a recovery in late 2012 compels
us to pencil in a subdued private consumption growth of 5.7%
in 2012, compared with 6.4% in 2011.
Credit Squeeze To Delay Investment
Projects
In December, we mentioned that the growing risk of a credit
squeeze in Asia – largely a result of the unfolding eurozone debt
crisis – was becoming a serious threat to trade and economic
growth in the region (see our online service, December 20 2011,
'Credit Squeeze A Destabilising Risk In The Region'). With the
Vietnamese economy being heavily reliant on European bank
funding, we warn that difculties in obtaining nancing would
force businesses to delay investment projects. Furthermore,
growing risk aversion suggests foreign direct investment in-
ows could also shrink as multi-national companies attempt
to strengthen their balance sheets and reduce their portfolio
exposure to emerging markets.

Having said that, we are expecting 400 basis points of rate cuts
this year (taking the central bank's policy rate from 15.00% to
11.00% by end-2012) and this could perhaps cushion the impact
of a credit squeeze coming from European banks. Nonetheless,
foreign capital inows have played a key role in driving gross
xed capital formation (GFCF) growth in recent years and we
believe that the above factors will keep GFCF growth depressed
over the coming months. Unless we see a recovery in investor
sentiment (not our core view), we are keeping our forecasts for
GFCF growth to remain subdued at 5.1% in 2012.
Growing Fiscal Debt Burden To Keep
Public Spending In Check
The unfolding sovereign debt crisis in the eurozone has severely
undermined foreign investors' condence in heavily indebted
countries. We believe that this will, to a certain extent, help
deter Vietnamese policymakers from taking on further debt to
fund public spending programs to boost growth. Indeed, we
are beginning to witness a shift in the government's traditional
pro-growth stance, with Prime Minister Nguyen Tan Dung re-
iterating the government's resolve in maintaining a more stable
and sustainable growth model. Although we expect welfare
subsidies to remain large in light of a challenging economic
environment in 2012 and our view that rural incomes could
decline as a result of falling crop prices, we believe spending
cuts will come from government-funded investment projects.
The Vietnamese government's resolve to bring down ination
even at the expense of slower economic growth in 2012, sug-
gests that public spending will be kept in check. Accordingly,
we expect public spending growth to ease from 5.9% in 2011
to 5.0% in 2012.

Trade Decit Set To Stay
As the accompanying chart shows, an 8.5% devaluation in the
Vietnamese dong in the beginning of 2011 has helped to reduce
Vietnam's trade decit from US$12.1bn in 2010 to US$9.3bn
in 2011. However, we warn that external demand may turn out
Source: General Statistics Ofce, BMI
Improving But Still In Decit
Goods Exports & Imports, US$mn (LHS) & Trade Balance,
US$mn (RHS)
-4,000
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
0
2,000
4,000
6,000
8,000
10,000
12,000
Jan-05
Jun-05
Nov-05
Apr-06
Sep -06
Feb-07

Jul-07
Dec-07
May-08
Oct-08
Mar-09
Aug -09
Jan-10
Jun-10
Nov-10
Apr-11
Sep -11
Feb-12
Trade Balance
Exports
Imports
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VIETNAM Q2 2012
to be weaker than we initially expected. Thus, it is possible to
see the trade decit widen in 2012. As mentioned before, as
our global team is pencilling in a bleak outlook for eurozone,
US and China growth, we in turn expect Vietnamese export
growth to ease from an expected 15.0% in 2011 to 8.9% in 2012.
Consequently, we continue to see net exports as a key drag on
growth and we are happy to maintain our forecast for real GDP
growth to come in at 5.8% in 2012, down from 5.9% in 2011.
Monetary Policy
Surge In Headline CPI Transitory, View
On Rate Cuts Holds

BMI VIEW
The latest surge in month-on-month headline consumer price ination
(CPI) from 0.5% in December to 1.0% in January should prove to be
transitory, in our view. In terms of the fundamentals behind the outlook
for ination, namely money supply growth and commodity prices, we
remained convinced that we will see a sustained slowdown in headline
CPI to average a comfortable 8.5% in 2012. Accordingly, we continue
to see 400 basis points worth of rate cuts by the State Bank of Vietnam,
bringing the policy rate from 15.00% to 11.00% by the end of the year.
In line with our expectation that inationary pressures would
resurface during the Tet holiday season (Vietnamese lunar new
year), latest gures showed that headline consumer price ina-
tion (CPI) accelerated from 0.5% month-on-month (m-o-m) in
December to 1.0% in January (see our online service, January
20, 'Near Term Upside For VNI, But Bonds Over Equities View
Holds For 2012'). From our perspective, this surge in ination,
which has broken the trend of a steady decline in month-on-month
ination in Q411, will be transitory as indicated by historical
data. Looking at monthly data on ination over the past ve
years (2007-2011), we note that there is clear evidence of a
tendency for headline CPI to accelerate in the rst two months of
the year (see chart below). We are convinced headline CPI will
soon resume its downward trajectory over the coming months,
given the fact that fundamentals with regards to money supply
and commodity prices remain unchanged. Accordingly, we are
maintaining our forecast for headline CPI to average a comfort-
able 8.5% in 2012. We continue to see 400 basis points (bps)
worth of rate cuts by the State Bank of Vietnam (SBV), bringing
the policy rate from 15.00% to 11.00% by the end of the year.
Weak Money Supply Growth To Keep

Ination In Check
According to gures published by the SBV, M2 money supply
growth is expected to come in at 10.0% in 2011 while the central
bank is targeting M2 growth of 14.0-16.0% in 2012. This, in
comparison to M2 growth rates that averaged 32.5% over the
past ve years (2006-2010) reinforces our view that ination-
ary pressures will be kept in check. We also expect demand for
credit to cool, in line with our view that growth in export-related
industries will continue to slow over the coming months.
Since early 2011, the SBV has been consistent in its hawkish
rhetoric on bringing ination down to the single-digit levels.
We believe that this has contributed signicantly towards an-
Source: General Statistics Ofce, BMI
A Seasonal Phenomenon
Headline CPI, % chg m-o-m
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Jan-07
Apr-07
Jul-07
Oct-07

Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
TABLE: MONETARY POLICY
2009 2010 2011e 2012f 2013f 2014f 2015f 2016f
Exchange rate VND/US$, ave [3] 17,800.79 19,133.98 20,653.31 21,035.00 20,800.00 20,565.00 20,330.00 20,100.00
Consumer prices, % y-o-y, ave [1,4] 7.0 9.2 18.6 8.5 5.0 5.5 5.0 5.0
Central Bank policy rate, % eop [5] 9.00 9.00 15.00 11.00 9.00 8.00 7.00 7.00
Lending rate, %, ave [6] 10.1 14.0 19.5 13.0 11.0 10.0 9.0 8.0
Real lending rate, %, ave [2,7] 3.1 4.8 0.9 4.5 6.0 4.5 4.0 3.0
Notes: e BMI estimates. f BMI forecasts. 1 Base year 2000; 2 Real rate strips out the effects of ination; Sources: 3 BMI. 4 General Statistics Ofce; 5
State Bank of Vietnam; 6 IMF; 7 IMF/BMI.
17
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ECONOMIC OUTLOOK

choring ination expectations and investor condence in the
Vietnamese dong. Clearly, the government recognises that the
central bank's credibility in ghting ination is a crucial element
in supporting ongoing efforts to de-dollarise the economy and
address the structural imbalances that have contributed to the
macroeconomic instability in recent years. Having witnessed a
decisive shift in the government's agenda towards accepting a
more sustainable model of growth for the economy, we are op-
timistic that policymakers will stick to their promise to maintain
price stability even at the expense of weaker economic growth.
Consequently, we believe the SBV will continue to stick to
its ination and money supply targets for 2012, which should
translate into a sustained slowdown in headline CPI.
Expecting Single-Digit Ination
According to SBV governor Nguyen Van Binh, the central bank
is expecting headline CPI to come in at around 12.0% under a
pessimistic scenario and 8.5% under more optimistic assump-
tions for 2012. Our forecast indicates that we favour the SBV's
more optimistic scenario of 8.5% headline CPI to play out
over the coming quarters. We expect this to be the case given
that we believe Vietnam's real GDP growth will be below the
government's full year target of 6.0-6.5%, which means that
demand pull inationary pressures will be much more benign
compared to 2011. Furthermore, we argue that commodity
price pressures have eased considerably in recent months given
the deteriorating outlook for global economic growth in 2012.
Thus, cost-push inationary pressures will be less of a concern
in the medium term.
We are pencilling in real GDP growth of 5.8% for Vietnam in
2012 and we caution that the risks to our outlook remain skewed

towards the downside. Should the global economy deteriorate
further over the coming months, we would consider revising our
growth forecasts downward. If such a scenario were to transpire,
this would prompt the SBV to take a more dovish stance on
monetary policy, raising the possibility of additional rate cuts.
Balance Of Payments
Global Economic Headwinds Cloud
Outlook For BoP
BMI VIEW
Vietnam's balance of payments position remains vulnerable to global
economic headwinds in 2012. While the trade decit has narrowed sig-
nicantly in recent months, our conviction that external demand will
continue to cool in 2012 means that we see a widening of the current
account decit. Meanwhile, risks of a hard landing in China and a credit
squeeze from European banks continue to cloud the outlook for the
nancial account.
Despite encouraging evidence of a steady improvement in
Vietnam's balance of payments position in recent months, we
are keeping a cautious stance on our outlook for 2012. Our
core view that global economic headwinds will continue to
drag on external demand and investor sentiment, suggests that
Vietnam's balance of payments position will remain vulnerable
to signicant downside risks ahead.
Vietnam's persistent trade decits remain a major concern for
policymakers as the country remains heavily reliant on remit-
Source: General Statistics Ofce, BMI. (Feb-12 onwards = forecasts)
Back To Single-Digits
Headline Consumer Price Ination
-10
-5

0
5
10
15
20
25
30
35
40
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11

Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Headline CPI, % chg y-o-y
Annualised m-o-m 3mma, %
Source: General Statistics Ofce, BMI
Sustained Improvement Needed
Goods Exports & Imports, US$mn (LHS) & Trade Balance,
US$mn (RHS)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06

Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
-4,000
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
Trade Balance
Exports Imports
18
Business Monitor International Ltd
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VIETNAM Q2 2012

Not Counting On A Trade Surplus
Looking at the latest trade gures, we have witnessed a steady
improvement in the trade decit since the SBV devalued the
Vietnamese dong by 8.5% in February 2011. We should point
out, however, that this improvement in the trade decit was
not entirely a result of a weaker dong against the US dollar.
Indeed, the impact of the devaluation was further amplied by
an appreciation in regional currencies across-the-board, result-
ing in a signicant boost in the competitiveness of Vietnamese
exports to Asia. Accordingly, we see the Vietnamese dong's
performance relative to its regional peers as an important factor
to consider in determining the outlook for exports. Given that
we are expecting a challenging economic environment ahead for
export-reliant economies, we see increasing risk of a competitive
devaluation in the region as policymakers attempt to prop up
economic growth. Indeed, should Vietnam's key trading part-
ners decide to depreciate their currencies against the US dollar
and by extension, the Vietnamese dong, this would reduce the
attractiveness of Vietnamese exports in the region. In line with
our conviction that external demand will continue to cool on
the back of a slowdown in global economic growth, we expect
the current account decit to widen in 2012.

Little Support From The Financial
Account
Turning to the nancial account, we note that foreign direct
investment (FDI) inows have remained resilient despite the
macroeconomic instabilities in Vietnam. Although FDI inows
into Vietnam witnessed a signicant decline during the 2008-
09 global nancial crisis, the country remains among one of

the top 10 countries in Asia in attracting foreign investment
tances and foreign direct investment (FDI) inows to offset
its trade shortfall. This over-reliance on remittances and FDI
inows inevitably means that Vietnam's balance of payments
position is highly vulnerable to global economic downturns.
As demonstrated during the 2008-09 global nancial crisis, a
simultaneous decline in exports, remittances and FDI inows,
prompted the State Bank of Vietnam (SBV) to draw down
foreign reserves in an attempt to defend its xed exchange
rate regime. Having depleted the country's foreign reserves to
less than a few weeks worth of import cover, the central bank
was eventually forced to devalue the currency by a cumulative
18.7% over a span of three years (2008-2010). Unless we see a
sustained improvement in the trade balance, and by extension,
the current account over the coming months, we remain cautious
on Vietnam's balance of payments outlook in 2012.
Source: IMF/IFS, BMI
A Precarious Position
Foreign Reserves Excluding Gold, US$mn
0
5,000
10,000
15,000
20,000
25,000
30,000
Jan-02
May-02
Sep-02
Jan-03

May-03
Sep-03
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Foreign Reserves Excluding Gold, US$mn
TABLE: CURRENT ACCOUNT
2009 2010 2011e 2012f 2013f 2014f 2015f 2016f
Goods and services exports, US$bn [1,2] 63.6 80.1 87.7 97.5 109.8 123.7 139.3 156.8
Goods and services imports, US$bn [1,3] 76.1 93.0 102.9 114.6 127.6 142.2 158.4 176.5

Balance of trade in goods and services, US$bn [1,4] -12.5 -12.9 -15.2 -17.0 -17.8 -18.5 -19.1 -19.6
Balance of trade in goods and services, % of GDP [5] -13.4 -12.5 -12.6 -12.6 -11.6 -10.5 -9.5 -8.6
Net income, US$bn [5] 17.2 21.6 24.6 28.0 31.7 36.0 40.9 46.4
Income account balance, % of GDP [5] 18.5 20.9 20.5 20.6 20.7 20.5 20.4 20.3
Net transfers, US$bn [5] 6.5 8.7 9.5 10.5 11.5 12.7 13.9 15.3
Net transfers, % of GDP [5] 7.0 8.4 7.9 7.7 7.5 7.2 7.0 6.7
Current account, US$bn [5] -6.0 -4.3 -5.7 -6.6 -6.3 -5.8 -5.2 -4.3
Current account, % of GDP [5] -6.5 -4.1 -4.7 -4.8 -4.1 -3.3 -2.6 -1.9
Notes: e BMI estimates. f BMI forecasts. 1 Includes Investment Income ows up until 2004; Sources: 2 Asian Development Bank, General Statistics
Ofce from 2010. 3 Asian Development Bank, General Statistics Ofce from 2015; 4 Asian Development Bank, General Statistics Ofce from 2020; 5
Asian Development Bank.
19
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ECONOMIC OUTLOOK
(see our online service, August 2 2011, 'Indonesia Shines As
A Regional Favourite For FDI'). According to a statement
from the Ministry of Planning and Investment, FDI inows
are estimated to have surged by 34.1% from US$8.2bn in 2010
to US$11bn in 2011. Looking ahead, we expect FDI inows
to grow at a much slower pace in 2012. According to a report
published by the UN Conference On Trade And Development,
Hong Kong is the largest investor in Vietnam with committed
FDI of US$2.9bn, followed by Singapore (US$1.4bn), Japan
(US$0.9bn), China (US$0.6bn) and South Korea (US$0.5bn)
in 2011. More importantly, we note that FDI inows coming
from China and Hong Kong combined, amounted to US$3.5bn
or 31.8% of total FDI inows in 2011. Given that we are begin-
ning to see signs of a hard landing for the Chinese economy
in 2012, we see a potential decline in FDI inows from China

and Hong Kong.
Credit Squeeze From European Banks
To Drag On FDI Inows
Back in December 2011, we highlighted evidence of a credit
squeeze in the region as European banks attempt to strengthen
their capital ratios by calling back higher-risk loans and impos-
ing curbs on issuing new loans to emerging markets (see 'Credit
Squeeze A Destabilising Risk In The Region', December 20
2011). We believe this credit squeeze as a result of the unfolding
sovereign debt crisis in the eurozone, will drag on FDI inows
into Vietnam. According to data from the Bank For International
Settlements, foreign claims (or lending) from European banks
in Vietnam have surged to US$11.3bn in the third quarter of
2011 more than ten times the amount seen a decade ago. Should
the eurozone crisis takes a turn for the worse, funds from these
European sources could decline.
Overall, we are beginning to see positive evidence that a decisive
shift in the Vietnamese government's stance towards ironing out
the macroeconomic imbalances in the economy has helped to
stabilise Vietnam's balance of payments position. However, as
mentioned above, stubborn global economic headwinds continue
to present signicant downside risks to the economy, which
compels us to take a cautious stance on the country's balance
of payments outlook in 2012.
Fiscal Policy
Fiscal Position To Deteriorate On
Economic Headwinds
BMI VIEW
Stubborn global economic headwinds are expected to undermine the
Vietnamese government's efforts to reduce the country's persistent

budget decit in the near term. We expect the budget decit to widen
from an expected 2.6% of GDP in 2011 to 3.4% in 2012 before seeing
an improvement to 2.7% in 2013. Over the longer term, a lack of com-
mitment by the government to reduce welfare subsidies means that we
remain sceptical towards the government's plan to achieve a balanced
budget by 2020.
In line with our view that the Vietnamese economy will con-
tinue to cool over the coming quarters (we are pencilling in a
slowdown in real GDP growth from 5.9% in 2011 to 5.8% in
2012), we expect a deterioration in the country's scal posi-
Source: IMF/IFS, BMI
Keeping A Close Eye On FDI Inows
Foreign Direct Investment Inows, US$mn (LHS) &
% chg q-o-q (RHS)
-300
200
700
1,200
1,700
2,200
2,700
3,200
Q102
Q302
Q103
Q303
Q104
Q304
Q105
Q305

Q106
Q306
Q107
Q307
Q108
Q308
Q109
Q309
Q110
Q310
Q111
-100
-50
0
50
100
150
200
250
FDI Inflow s, US$mn
%chg q-o-q
Source: Bank For International Settlements, BMI
Sizeable European Exposure
Foreign Claims From European Banks, US$mn & % chg y-o-y
-4,000
-2,000
0
2,000
4,000
6,000

8,000
10,000
12,000
14,000
Q101
Q301
Q102
Q302
Q103
Q303
Q104
Q304
Q105
Q305
Q106
Q306
Q107
Q307
Q108
Q308
Q109
Q309
Q110
Q310
Q111
Q311
-40
-20
0
20

40
60
80
100
120
140
Foreign Claims, US$mn
% chg y-o-y
20
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VIETNAM Q2 2012
tion in 2012. Despite aggressive measures introduced by the
Vietnamese government to cut public spending and address
growing concerns over the country's persistent budget decit, we
believe that stubborn global economic headwinds will continue
to undermine progress on this front. Welfare subsidies are set
to increase as cooling external demand translates into higher
unemployment for the manufacturing sector. Furthermore, we
expect tax revenue growth to slow signicantly as a result of
cooling private sector income growth. Accordingly, we expect
the budget decit to widen from an expected 2.6% of GDP in
2011 to 3.4% in 2012. However, given that we see a potential
recovery in external demand in late 2012, we are pencilling a
slight improvement in the budget decit to 2.7% in 2013.
Increase In Education Spending
Positive, But Subsidies Remain High
Back in February 2011, we highlighted the structural weaknesses
in the allocation of the scal budget and the resulting imbalances
in the Vietnamese economy (see our online service, February 1

2011, 'Fiscal Balance Not So Easy'). Looking at the latest gures
published by the Ministry of Finance, we note that education
subsidies as a share of total social expenditure have increased
signicantly from 37.4% in 2010 to 45.5% in 2011. We see this
as a positive move by the government to boost the productivity
and quality of Vietnam's labour force, which should help sup-
port the country's long-term economic growth. However, there
was a negligible reduction in the share of welfare subsidies as
a total of social expenditure from 32.7% in 2010 to 31.3% in
2011. This reinforces our view that the government is unlikely
to implement any credible plans to reduce welfare subsidies
within the short-to-medium term.
Our global team expects growth to remain depressed in the US
and is pencilling a mild recession in the eurozone for 2012.
Meanwhile, the Chinese economy is increasingly at risk of a
hard landing. Given that these economies remain the largest
export destinations for Vietnam's manufactured goods, we see
an increasing risk that a slowdown in external demand could
eventually result in higher unemployment in the manufactur-
ing sector. This would trigger the need for additional welfare
subsidies by the Vietnamese government, further weighing on
the country's already weak scal position.
Not In A Good Shape
Fiscal Accounts, VNDbn (LHS) & Budget Balance, % Of GDP
200,000
300,000
400,000
500,000
600,000
700,000

800,000
900,000
1,000,000
2005
2006
2007
2008
2009
2010
2011e
2012f
2013f
-7
-6
-5
-4
-3
-2
-1
0
1
2
Total Revenue
Total Expenditure
Budget Deficit, % of GDP RHS
f = BMI forecasts. Source: Ministry of Finance, BMI
Welfare Subsidies To Inate Budget Decit
Share Of Total Social Expenditure, %
Science &
Technology

Others
Social Subsidies
Health
Education
Source: Ministry of Finance, BMI
TABLE: FISCAL POLICY
2009 2010 2011e 2012f 2013f 2014f 2015f 2016f
Fiscal revenue, VNDbn [1] 442,340.0 559,170.0 674,500.0 715,977.2 823,034.6 922,265.9 1,023,752.7 1,126,297.5
Revenue, % of GDP [1] 26.7 28.2 27.1 25.1 25.8 25.5 25.1 24.5
Fiscal expenditure, VNDbn [1] 527,342.0 605,640.0 710,160.0 813,285.6 910,879.9 1,011,076.7 1,112,184.3 1,214,913.4
Expenditure, % of GDP [1] 31.8 30.6 28.5 28.5 28.5 27.9 27.3 26.4
Budget balance, VNDbn [1] -108,722.0 -87,725.0 -64,300.0 -97,308.4 -87,845.3 -88,810.7 -88,431.7 -88,615.9
Budget balance, % of GDP [1] -6.6 -4.4 -2.6 -3.4 -2.7 -2.5 -2.2 -1.9
Notes: f BMI forecasts. Sources: 1 Ministry of Finance.
21
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ECONOMIC OUTLOOK
Defence Spending Set To Rise Steadily
On China's Growing Military Presence
China's growing military presence in the South China Sea has
contributed to several small-scale conicts between China and
neighbouring countries including Vietnam in recent years. More
importantly, the threat of Beijing's growing military power in
the region has put tremendous pressure on Hanoi to increase
spending on defence and security in recent years. Defence and
security spending grew 11.7% from VND74trn (US$3.6bn) in
2010 to VND82.7trn in 2011. Given that bilateral tensions are
expected to remain delicate in the South China Sea, we expect
defence spending to increase steadily over the coming years.

Reduction In Welfare Subsidies Key To
Achieving Fiscal Balance By 2020
From our perspective, bringing the budget decit back into
balance will require further spending cuts by the government,
especially a gradual reduction in welfare subsidies, over the
coming years. However, we have yet to see evidence of a strong
commitment by the government to reduce welfare subsidies. This
should not come as a surprise given that public dissent against
the government has increased as a result of rampant corruption
in recent years. We note that a reduction in welfare subsidies
is seen as an unpopular policy that could potentially fuel wide-
spread public unrest, ultimately undermining the stability of
Vietnam's single-party system of government. Thus, plans to
reduce welfare subsidies are expected to take a back seat before
economic conditions become more favourable. Consequently,
we remain skeptical that the government's plan to achieve a
balanced budget by 2020 will be achievable. We are happy to
maintain our forecasts for the scal budget to improve gradually
but remain in decit over the coming decade.
Playing A Lesser Role In The Economy
Fiscal Revenue & Expenditure, % chg y-o-y
0
5
10
15
20
25
30
35
1995

1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011e
2012f
2013f
2014f
2015f
Total Revenue Total Expenditure
f = BMI forecasts. Source: Ministry of Finance, BMI

23
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Chapter 3:
10-Year Forecast
The Vietnamese Economy To
2021

Rebalancing Needed To Maintain High
Growth
BMI VIEW
We remain positive about Vietnam's growth prospects over the next
10 years, as seen in our rm growth projections, averaging 7.1% over
2012-2021. This is because we expect a shift in government policy to
accommodate the effects of a less conducive global environment and
a need to avoid overheating tendencies such as high ination and a
large trade decit, which have characterised the Vietnamese economy
in recent years.
Vietnam's emergence as one of the most promising economies
in Asia, if not the world, stems largely from the Communist
Party of Vietnam (CPV)'s adoption of market reform policies
in 1986. The gradual but steady shift from a largely agrarian
country with a high degree of state ownership and government
intervention to a bustling market economy has stimulated foreign
investment and domestic entrepreneurship, which are now the
prime drivers of growth.
The attractions of Vietnam to foreign, as well as domestic, in-
vestors are clear: a large and young population, eager to work
hard to improve their lot and open to foreign inuences after
decades of ineffective ideological indoctrination. Vietnam has
enjoyed a growing inow of direct investment into its edgling
manufacturing sector in recent years as its accession to the
WTO in 2007 and low labour costs have made it an attractive
outsourcing destination for apparel manufacturers and electronics
producers. The development of the foreign-owned manufactur-
ing sector has been spearheaded by Japanese, South Korean and
Taiwanese rms, which have become increasingly wary of rising
costs of labour on the Chinese mainland, as well as the risks of

becoming overly dependent on Beijing in their supply chains.
We expect foreign investment into the manufacturing sector to
continue to drive growth over the next 10 years, and to help Viet-
nam move up the value-added chain as the advantages of sourcing
Vietnam To Enter 100 Million Club
Population, mn
50
60
70
80
90
100
110
120
2000 2005 2010 2015 2020
Source: UN World Population Prospects, 2006 Revision
TABLE: LONG-TERM MACROECONOMIC FORECASTS
2014f 2015f 2016f 2017f 2018f 2019f 2020f 2021f
Nominal GDP, US$bn [2] 175.9 200.6 228.7 259.2 292.3 329.7 372.0 419.8
Real GDP growth, % chg y-o-y [2] 7.3 7.3 7.4 7.4 7.4 7.4 7.4 7.5
Population, mn [3] 91.6 92.4 93.3 94.1 94.9 95.6 96.4 97.0
GDP per capita, US$ [2] 1,921 2,170 2,452 2,754 3,080 3,447 3,861 4,326
Consumer prices, % y-o-y, ave [1,4] 5.5 5.0 5.0 5.0 5.0 5.0 5.0 5.0
Current account, % of GDP [5] -3.3 -2.6 -1.9 -1.2 -0.6 0.1 0.7 1.3
Exchange rate VND/US$, ave [6] 20,565.00 20,330.00 20,100.00 20,000.00 20,000.00 20,000.00 20,000.00 20,000.00
Notes: f BMI forecasts. 1 Base year 2000; Sources: 2 Asian Development Bank, General Statistics Ofce. 3 World Bank/UN/BMI; 4 General Statistics
Ofce; 5 Asian Development Bank; 6 BMI.
24
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VIETNAM Q2 2012
BMI's long-term macroeconomic forecasts are based on a variety of quantitative and qualitative factors. Our 10-year forecasts assume in most
cases that growth eventually converges to a long-term trend, with economic potential being determined by factors such as capital investment,
demographics and productivity growth. Because quantitative frameworks often fail to capture key dynamics behind long-term growth determinants,
our forecasts also reect analysts' in-depth knowledge of subjective factors such as institutional strength and political stability. We assess trends in
the composition of the economy on a GDP by expenditure basis in order to determine the degree to which private and government consumption,
xed investment and the export sector will drive growth in the future. Taken together, these factors feed into our projections for exchange rates,
external account balances and interest rates.
production in the country become apparent for a wider range of
manufacturing rms. However, we believe the global environment
will be less conducive to external demand-driven economies in
the years to come, meaning Vietnam will not be able to reach
real GDP growth rates above 8.0% as seen in 2004-2007. Indeed,
the near-exclusive focus of the government on meeting highly
set growth targets through accommodative scal and monetary
policy has led to serious macroeconomic imbalances in the form
of high ination and ballooning trade and scal decits over 2007
and 2009. We believe steps will need to be taken going forward
to curb overheating tendencies, including currency appreciation.
This would inevitably come at the cost of lower growth in the
medium term, and we expect the government to start targeting
annual real GDP growth of 7.0-7.5% over 2012-2016, instead of
8.0-8.5% as it has been previously.
We do not foresee this constituting a turning point in the Viet-
namese growth story, merely adjusting growth rates to lower
more sustainable trajectories. The main effect will be to de-
crease the share of net exports from a massive -15.2% of GDP
(in nominal terms) in 2008 towards -9.2% in 2013 and -3.6%
in 2020 as export growth starts outpacing import growth after
private consumption and xed gross capital formation settle at

more sustainable levels. A decreasing trade decit combined
with continued growth, albeit at a slower pace, of remittances
and foreign direct investment should mean that upside pressure
on the dong should resume once the government has tightened its
scal and monetary policy to curb the stimulus-driven increase
in domestic demand in 2009. We thus expect the dong to start
to appreciate beyond the initial depreciation needed in 2010
and 2011. We are currently envisaging a mild 1.1% apprecia-
tion in 2012 to be followed by an average 2.8% appreciation
over 2013-2020.
Key Risks: Competition With China,
Ination, Infrastructure and Education
While a shift in economic policy is needed, it is far from guar-
anteed. Less accommodative scal and monetary policy is likely
to lead to the elimination of less efcient rms and layoffs, an
unappealing prospect for the political leadership. Vietnamese
rms are still less efcient than their Chinese counterparts, as
evidenced by the large amount of cheap Chinese goods ood-
ing the Vietnamese market and the six point advantage (51.7
compared with 45.2) China enjoys over Vietnam in our business
environment ratings. The massive US$11.1bn bilateral trade
decit in China's favour in 2008 means that the Vietnamese
government will be averse to taking any steps that will impair
the relative cost- competitiveness of domestic rms.
An appreciating currency would dampen inationary pressures,
and we foresee consumer price ination stabilising at around
5% annually from 2013 onwards. However, this is conditional
on the government resolving bottlenecks in infrastructure and
power supply. Vietnam's limited road, rail and port capacity is
still putting it at a disadvantage compared with China when it

comes to foreign investment in export-focused manufacturing.
Moreover, the continued divide between demand and supply of
energy and resulting power cuts is a key threat to both growth
and ination. Energy policy is an area that will have to be ad-
dressed with more resolve than at present, as the government
has impaired investment in power generation by its reluctance
to expose state-owned EVN to competition.
Continued reform of the economy through the ongoing 'equitisa-
tion' process of raising efciency at state-owned enterprises and
transferring ownership to private hands will also be required
to reach annual GDP growth of 7%, as well as a concerted ef-
fort to improve standards at all levels of the education system.
Skilled staff are becoming increasingly difcult to nd, result-
ing in upward pressure on wages and increased costs for rms,
particularly in the edgling nancial sector. Vietnam will need
to increase the number of high-standard university graduates in
areas such as nance and science if it wants to avoid becoming
trapped in low-value manufacturing.